Funding Wisconsin’s future innovators

After five years, the Badger Fund of Funds is ready to make waves in Wisconsin startup investment.

Given our belief in rankings — and the most recent Ewing Marion Kauffman Foundation startup index from 2017 is as credible a source as any — Wisconsin is a black hole for startups.

Ranking dead last in the nation in startup activity for three straight years is a black eye for the Badger State, but it’s not as if good ideas aren’t being born in Wisconsin every day. Those ideas just need a little more nurturing before they can take root and become growing companies.

State officials know this, which is why the Badger Fund of Funds was created five years ago as a limited partnership to invest in Wisconsin-based venture capital funds that will in turn invest in Wisconsin-based new ventures. New businesses account for nearly all net new job creation, so fostering homegrown entrepreneurs stands to benefit everyone in Wisconsin.

Five years is a good, round length of time at which to examine the progress of the Badger Fund of Funds, although as it turns out, much of the Badger Fund’s work remains ahead of it. That’s because, while the state committed $25 million to the fund when it was created, fund managers were tasked to raise additional capital from the private sector themselves prior to any early-stage investment actually taking place. That’s a lengthy, arduous process that has only recently begun to yield fruit, notes Ken Johnson, managing director of Kegonsa Capital Partners, the Madison-based venture capital management firm that along with Sun Mountain Capital, a New Mexico-based investment firm, was pegged by the state to run manage the Badger Fund of Funds as Sun Mountain Kegonsa.

“The fly in the tale is the time it takes to raise additional capital,” Johnson explains. “As a Wisconsin taxpayer, state monies should prime the pump, not be the only water in the bucket. The Badger Fund team has worked hard to significantly increase the private sector match to the state’s priming.”

In Johnson’s Wisconsin fund-raising experience, it takes a month to raise $1 million from the private sector, and while raising money the fund manager is not paid. Each Badger Fund manager — there are seven — can spend 12 to 18 months raising matching private-sector capital. “Take it from someone who has done fundraising a number of times — it’s a very tough and ugly job,” says Johnson.

A fund is born

In the early 1990s, Johnson was a licensing associate with the Wisconsin Alumni Research Foundation (WARF) with the responsibility of initiating a WARF program to license startups or spinouts from the UW–Madison. That experience provided Johnson’s early education about startups from the product or technology side of the business.

Unexpectedly, an investment bank of a WARF licensee, Paramount Capital, offered Johnson an opportunity to move to the investment side of the startup business, something Johnson recalls was a great opportunity but required him to live every other week in Manhattan. “Fun for a while, but travel wears one out,” states Johnson.

In the late 1990s, Johnson started ConLinCo, a company based on late partner and UW–Madison Professor Mark Cook’s patents that the duo licensed from WARF. The company sold in less than two years and that was enough to get Johnson hooked on starting companies.

“By 2005, I started seven companies — three failed, one went on forever, but two companies in addition to ConLinCo had nice exits,” notes Johnson. Tetrionics was acquired for $57 million by Sigma Aldrich and is still based in Dane County, while Natural was acquired for $80 million.

Johnson used this successful startup track record to start Kegonsa Capital Partners as the general partner of the Kegonsa Seed Fund, which closed in January 2005 with 37 investors and $10.7 million to invest. According to Johnson, the Kegonsa focus was to be the first $500,000 investment in pre-revenue companies — essentially the same company profile as his personal startups.

The Kegonsa Seed Fund has since had exits of $50 million, $35 million, $20 million, and $140 million. In 2008, Kegonsa Capital Partners added a second fund, the Coinvest Fund, to make follow-on investments.

Around 2010, Johnson became convinced that what the Wisconsin startup ecosystem needed was many venture capital funds investing in a couple hundred thousand dollars to million-dollar increments — much like the Seed and Coinvest funds. The only trouble was, Johnson didn’t how to start, invest, or manage multifunds.

“At the time, Lorrie Keating Heinemann was the head of Wisconsin’s Department of Financial Institutions,” Johnson explains. “Lorrie had evaluated initiating a fund-of-funds program for the state but couldn’t get state funding. However, she did a good job of teaching me how a fund-of-funds program works and who were the players.”

Serendipitously, Kegonsa Capital Partners’ web guru knew Brian Birk, managing partner and founder of Sun Mountain Capital. Unlike Kegonsa, Sun focused on managing fund-of-fund programs. Birk went college at Carlton, got his first job at GE in Waukesha, and spent 10 years with BCG in Chicago, so he had a Midwest background, notes Johnson.

“I flew to the Sun office in Santa Fe and met the Sun team and a number of the Sun portfolio fund managers,” says Johnson. “Brian was intrigued with the Kegonsa ‘Money for Minnows’ investment strategy and came up to Wisconsin to do his due diligence. The result was that Sun Mountain and Kegonsa formed a partnership, Sun Mountain Kegonsa, to manage the Wisconsin fund-of-funds program.”

One Wisconsin advantage on the state level is both parties have been supportive of building the Wisconsin startup ecosystem, says Johnson. The Act 255 tax credits for seed and early-stage investors — that would be Badger Fund investors — was initiated by a Republican Assembly and signed into law by Democratic Governor Jim Doyle.

Act 41 provided the $25 million dollars of tax money to be invested in the Badger Fund and was passed by the Assembly 89–2 and the Senate 30–3.

Badger Fund breakdown

The Badger Fund of Funds has 27 limited partners, one of which is the state of Wisconsin with its initial $25 million commitment. Sun Mountain Kegonsa (SMK) as the general partner committed $500,000. There are 25 additional limited partners in the Badger Fund, including Johnson himself a second time, as he invested both as a member of SMK and as a limited partner.

“It took about two years from the state’s commitment and the SMK commitment to raise the additional private-sector funding,” notes Johnson. The state required at least a $5 million match from the private sector, but SMK has so far gone above and beyond with closer to $10 million in matching funds from the private sector.

SMK had until June of this year to make financial commitments to Badger Fund portfolio VC funds. So far, the Badger Fund has made seven commitments, five of which have been made public: the Idea Fund in La Crosse; Winnebago Fund in Neenah; Rock River Fund, with offices in Madison and Beloit; Bold Coast Fund in the Milwaukee area; and the Winnow Fund, based in Madison and with a focus on innovative products coming out of the UW System.

Of the two remaining commitments, one is in Dane County and one is in the south Milwaukee/Kenosha area. According to Johnson, the Idea, Winnebago, and Rock River funds have publicly disclosed their capital commitments — the Idea Fund raised $13 million, Winnebago Fund $11 million, and the Rock River Fund over $23 million.

Specifically, the Idea Fund and Winnebago Fund started investing in July 2017 and have made 11 investment offers; seven of those offers have been closed with checks written and four are in the due diligence stage. As of this writing, five Badger Fund portfolio companies have made their investment public — Curate and Agrograph are Madison-based companies, American Provenance in Blue Mounds, Third Element in Green Bay, and Sift MD in Milwaukee.